SNC-Lavalin shares hit 10-year low after warning profits will be even thinner

The Canadian Press

Published: Feb 11 at 8:28 a.m.

Updated: Feb 11 at 5:56 p.m.

MONTREAL — SNC-Lavalin Group Inc. has slashed its profit forecast again due to problems at a Chilean mining project, plunging its share price to a 10-year low as the beleaguered engineering giant faces obstacles at home and abroad.

The Montreal-based company reduced its guidance for 2018 by more than 40 per cent Monday and halted all bidding on future mining projects.

That comes two weeks after it halved its forecast from November amidst a diplomatic feud between Canada and Saudi Arabia — a key source of oil and gas revenue — and delays on its project with Codelco, Chile's state-owned copper mining company.

SNC has agreed to settle a dispute with Codelco through a "fast-tracked" arbitration process. But the hit to SNC's mining and metallurgy business will be bigger than what it had said on Jan. 28 because arbitration won't be completed in time to recognize the revenue in its 2018 results, the company said.

SNC said it expects "significant recoveries in the future."

Shares dropped more than seven per cent to close at $34 Monday — their lowest since April 2009 — as the company's legal and diplomatic hurdles continue to loom large.

On Monday, the federal ethics commissioner launched an investigation into allegations the Prime Minister's Office put pressure on former attorney general Jody Wilson-Raybould to help the company avoid a criminal prosecution following heavy lobbying from the company.

Trudeau has denied that the minister "was ever directed by me or anyone in my office to take a decision in this matter."

Federal prosecutors told SNC in October they would not invite the company to negotiate a remediation agreement over fraud and corruption charges that stemmed from alleged dealings with the Libyan regime under Moammar Gadhafi between 2001 and 2011.

SNC has filed for a judicial review of the decision, which closed the door on a potential deal that would see the government set aside the criminal charges in return for fines and other penalties. A conviction on the charges filed in 2015 could prevent the company from bidding on any federal project for up to 10 years.

Last month, SNC chief executive Neil Bruce said ongoing diplomatic tensions between Canada and Saudi Arabia were hurting business and forcing the company to consider a possible retreat from the oil-rich state.

The feud, as well problems with the mining project and an arbitration loss in Australia, prompted the company to cut its financial guidance on Jan. 28, resulting in a drastic drop in the company's shares.

Last week, SNC-Lavalin shareholder Ruediger Martin Graaf requested permission from Quebec Superior Court to bring a class action lawsuit for what he calls the company's "false or misleading" statements about the situation in Saudi Arabia.

In its revised forecast Monday, SNC attributed the mining problems in Chile to subcontractors and factors out of its control.

"The challenges on this mining project are mainly due to unexpected site conditions, greater than expected environmental and safety measures and underperformance from subcontractors," the company said in a statement.

SNC called the issues an "isolated incident," but said it has stopped all bidding on future mining projects and launched a review of its management structure for mining and metallurgy, which brought in $433 million out of $2.92 billion in revenues in 2017.

The company has also deployed Ian Edwards, its new chief operating officer, to personally work on strengthening the local project team.

SNC did not name Codelco in its revised guidance Monday, but analysts widely acknowledge it as the problem project.

SNC said adjusted diluted earnings per share from the division of its engineering and construction business for 2018 will now be in the range of 20 to 35 cents, down from an already reduced forecast of between $1.15 and $1.30 in January from $2.60 to $2.85 in November.

That translates into an expected fourth quarter loss of $350 million before taxes and interest for the mining and metallurgy segment, according to SNC.

Adjusted consolidated diluted earnings per share for the company as a whole are expected to be in a range of $1.20 to $1.35, down from $2.15 to $2.30 forecast in January and 3.60 to $3.85 in November.

The company also introduced a 2019 guidance, targeting adjusted earnings per share for engineering and construction of between $2.00 and $2.20, slightly below the consensus $2.25, according to analyst Mona Nazir of Laurentian Bank Securities.

"While the investment community is accustomed to losses and problem projects for E&C companies, particularly ones with higher construction exposure, we believe the recent negative news, and more specifically continued changes in the outlook in a relatively short period of time, may cause investors to pause on the story," she wrote in a report.